Personal Finance Quiz

Compound Interest (formula)

(Original $ Amount + Earned Interest) x Interest Rate x Length of Time = Amount Earned

Capital Gains

profits from the sale of a capital asset such as stocks, bonds, or real estate. These profits are tax-deferred; you do not have to pay the tax on these profits until the asset is sold. Long-term capital gains occur on investments held more than 12 months. Short-term capital gains occur on investments held less than 12 months.

Bonds

A bond is an "IOU," certifying that you loaned money to a government or corporation and outlining the terms of repayment. They work when a buyer may purchase bond at a discount. The bond has a fixed interest rate for a fixed period of time. When the time is up, the bond is said to have "matured" and the buyer may redeem the bond for the full face value.

Real Estate Pro and Con

Advantages Excellent protection against inflation. Disadvantages Can be difficult to convert into cash. A specialized type of investment requiring study and knowledge of business.

Pro and Con of Stocks

Advantages If the market value goes up, the gain can be considerable. Money is easily accessible. Disadvantages If market value goes down, the loss can be considerable. Selecting and managing stock often requires study and the help of a good brokerage firm.

Mutual Funds Types

Balanced Fund includes a variety of stocks and bonds. Global Bond Fund has corporate bonds of companies from around the world. Global Stock Fund has stocks from companies in many parts of the world. Growth Fund emphasizes companies that are expected to increase in value; also has higher risk. Income Fund features stocks and bonds with high dividends and interest. Industry Fund invests in stocks of companies in a single industry (such as technology, health care, banking). Municipal Bond Fund features debt instruments of state and local governments. Regional Stock Fund involves stocks of companies from one geographic region of the world (such as Asia or Latin

Types of Bonds

Corporate Sold by private companies to raise money. If company goes bankrupt, bondholders have first claim to the assets, before stockholders. Municipal Issued by any non-federal government. Interest paid comes from taxes or from revenues from special projects. Earned interest is exempt from federal income tax. Federal government The safest investment you can make. Even if U.S. government goes bankrupt, it is obligated to repay bonds.

Simple Interest (formula)

Dollar Amount x Interest rate x Length of Time (in years) = Amount Earned

Choosing a Savings Account

Factors that determine the dollar yield on an account: Interest rate (also called rate of return, or annual yield) All money earned comes from this factor. The following factors reduce money earned and can even turn it into a loss: Fees, charges, and penalties Usually based on minimum balance requirements, or transaction fees. Balance requirements Some accounts require a certain balance before paying any interest. On money-market accounts, most banks will pay different interest rates for different size balances. (Higher balance earns a higher rate.) Balance calculation method Most calculate daily. Some use average of all daily balances.

Retirement Plans

Plans that help individuals set aside money to be used after they retire. Federal income tax not immediately due on money put into a retirement account, or on the interest it makes. Income tax paid when money is withdrawn. Penalty charges apply if money is withdrawn before retirement age, except under certain circumstances. Income after retirement is usually lower, so tax rate is lower.

Mutual Funds

Professionally managed portfolios made up of stocks, bonds, and other investments. Individuals buy shares, and fund uses money to purchase stocks, bonds, and other investments. Profits returned to shareholders monthly, quarterly, or semi-annually in the form of dividends.

Stocks

Stock represents ownership of a corporation. Stockholders own a share of the company and are entitled to a share of the profits as well as a vote in how the company is run. Company profits may be divided among shareholders in the form of dividends. Dividends are usually paid quarterly. Larger profits can be made through an increase in the value of the stock on the open market.

Real Estate

Ways To Invest Buy a house, live in it, and sell it later at a profit. Buy income property (such as an apartment house or a commercial building) and rent it. Buy land and hold it until it rises in value.

Certificates of Deposit (CD's)

What they are and how they work Bank pays a fixed amount of interest for a fixed amount of money during a fixed amount of time. Benefits No risk Simple No fees Offers higher interest rates than savings accounts. Trade-Offs Restricted access to your money Withdrawal penalty if cashed before expiration date (penalty might be higher than the interest earned) Types 1. Rising-rate CDs with higher rates at various intervals, such as every six months. 2. Stock-indexed CDs with earnings based on the stock market. 3. Callable CDs with higher rates and long-term maturities, as high as 10-15 years. However, the bank may "call" the account after a stipulated period, such as one or two years, if interest rates drop. 4. Global CDs combine higher interest with a hedge on future changes in the dollar compared to other currencies. 5. Promotional CDs attempt to attract savers with gifts or special rates.

What is Interest?

is calculated as a percentage of a loan/deposit balance, paid to the lender/individual periodically for the privilege of using their money. The amount is usually quoted as an annual rate, but interest can be calculated for periods that are longer or shorter than one year.